I appreciate the opportunity to appear before you today to discuss the potential for growth of natural gas consumption in the United States.

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those of the Department or the Administration. However, EIA's baseline projections on energy trends are widely used by government agencies, the private sector, and academia for their own energy analyses. Each year EIA publishes the Annual Energy Outlook, which provides projections and analysis of domestic energy consumption, supply, prices, and carbon emissions. These projections are not meant to be exact predictions of the future but represent a likely future, assuming known trends in demographics and technology improvements and also assuming no change in current laws, regulations, and policies.

The projections in this testimony are from the Annual Energy Outlook 2000 (AEO2000), published by EIA in December 19991. These projections represent a likely energy future, given technological and demographic trends, current laws and regulations, and consumer behavior as derived from known data. EIA recognizes that projections of energy markets are highly uncertain, subject to many random events that cannot be foreseen, such as severe weather, political disruptions, strikes, and technological breakthroughs. In addition to these short-term phenomena, long-term trends in technology development, demographics, economic growth, and energy resources may evolve along a different path than assumed in the Reference Case. Many of these uncertainties are explored through alternative cases in AEO2000.

In the Reference Case of AEO2000, total natural gas consumption is projected to increase from 22.4 trillion cubic feet in 2000, as estimated at the time the projections were finalized, to 29.9 trillion cubic feet in 2015. This total includes approximately 2.0 to 2.5 trillion cubic feet of natural gas consumed in the processing and delivery of the gas, as lease and plant fuel and pipeline fuel, and a very small amount for natural gas vehicles, which totals about 0.3 trillion cubic feet in 2015. Most of the natural gas is consumed in the residential, commercial, and industrial sectors and as fuel for electricity generation, which is the most rapidly growing use of natural gas in the projections (Figure 1).

Residential Natural Gas Consumption

Residential natural gas consumption established an all-time high in 1996, as heating degree-days weighted by the number of natural gas customers reached the highest level in more than 25 years. Since 1996, however, natural gas consumption in the sector has declined, as warmer-than-average winter temperatures decreased the need for space heating, the largest use for natural gas in the residential sector (Figure 2). Since space heating accounts for nearly 70 percent of natural gas consumption on an annual basis, it is not surprising that natural gas use in the residential sector has fluctuated from year to year over the past two decades. Water heating, cooking appliances, and clothes dryers account for more than 90 percent of natural gas use other than space heating.

Figure 3 details residential natural gas consumption by Census region. The Midwest and Northeast Census regions account for 61 percent of residential natural gas consumption nationwide. Colder winter temperatures and a higher concentration of homes heated with natural gas account for this result. In the AEO2000 Reference Case, residential natural gas consumption is projected to grow at 0.8 percent per year through 2015, a total of 0.6 trillion cubic feet, as improving equipment efficiency resulting from appliance turnover and growth in natural gas customers partially offset one another. Underlying Figure 3 is the notion that the U.S. population is migrating and will continue to migrate to warmer climates. The Northeast and Midwest, with relatively high natural gas intensities, have the least amount of housing construction projected for the next 15 years, relative to the South and West Census regions, further dampening the growth of natural gas in the sector.

Macroeconomic growth has a small impact on the residential sector. In the Low Economic Growth Case from AEO2000, the gross domestic product (GDP) is projected to increase at an average annual rate of 1.7 percent through 2020, compared to 2.2 percent in the Reference Case, and is projected to increase at an average rate of 2.6 percent a year in the High Economic Growth case. The average projected growth rate of residential natural gas consumption in the Low Economic Growth case is slightly reduced to 0.7 percent a year, compared to 0.8 percent a year in both the Reference and High Economic Growth Cases. Across these economic growth cases, natural gas consumption varies by less than 0.1 trillion cubic feet from the Reference Case level of 5.5 trillion cubic feet in 2015.

Commercial Natural Gas Consumption

Natural gas consumption in the commercial sector has fluctuated over the last few years as variations in weather have affected the level of natural gas use. A significant portion (normally about 38 percent) of commercial natural gas consumption is used to fuel space heating equipment in commercial buildings, causing relatively cold or relatively warm weather to have a noticeable effect on consumption. For example, commercial natural gas consumption in 1998, a much warmer year than normal, was 4 percent lower than in 1996, a year with colder-than-normal weather. (The projections in AEO2000 assume normal weather.)

Commercial natural gas consumption is expected to reach
3.2 trillion cubic feet in 2000, meeting 20 percent of the sector=s energy needs. Consumption is projected to grow to 3.6 trillion cubic feet by 2015, increasing at an average annual rate of 0.8 percent. Commercial floorspace is expected to grow 1.0 percent per year during the same period. The intensity of commercial natural gas use varies by region and climate with the Midwest Census region using the most and the South using the least natural gas per square foot of commercial floorspace (Figure 4). The less heating-intensive South is expected to see more growth in the commercial sector through 2015 than other regions of the country, dampening overall projected growth in natural gas consumption.

In 2000, natural gas consumption for commercial space heating is expected to be 1.2 trillion cubic feet, meeting 70 percent of the space heating needs in the sector (Figure 5). Water heating, cooking, and cooling account for 0.7 trillion cubic feet of commercial gas consumption. About 1.3 trillion cubic feet of natural gas consumption is projected for all other commercial end uses, including about 0.5 trillion cubic feet to provide combined heat and power and district services to the sector.

Macroeconomic growth is a strong determinant of commercial sector growth. Using the High and Low Economic Growth Cases from AEO2000 provides a range of the potential natural gas consumption in the commercial sector under varying economic conditions. In the Low Economic Growth Case, the growth rate of commercial natural gas consumption is reduced to 0.6 percent a year between 2000 to 2015 from 0.8 percent a year in the Reference Case. In the High Economic Growth Case, the growth rate of commercial natural gas increases to 1.0 percent a year through 2015.

Industrial Natural Gas Consumption

The industrial sector, including manufacturing, agriculture, mining, and construction, consumed 9.3 trillion cubic feet of natural gas in 2000, including lease and plant fuel, 42 percent of the total U.S. natural gas consumption. Industrial sector output is projected to grow 2.0 percent annually between 2000 and 2015 in the Reference Case of AEO2000. Over the same period, industrial natural gas consumption is projected to increase by 1.2 percent annually, reaching 11.2 trillion cubic feet in 2015 (Figure 6).

By 2015, the industrial sector=s share of total natural gas consumption will fall to 38 percent. In the High Economic Growth Case, industrial natural gas consumption is projected to increase to 12.0 trillion cubic feet in 2015, a 1.6-percent annual growth rate from 2000. The Low Economic Growth Case results in a projection of 10.6 trillion cubic feet for industrial natural gas consumption in 2015, a 0.8-percent annual growth rate.

Five industriesBsteel, paper, food, refining, and bulk chemicalsBare responsible for 70 percent of manufacturing natural gas
consumption (Figure 7). The projected annual growth rates in output for these
industries range from 0.8 percent for refining to 1.3 percent for bulk chemicals
between 2000 and 2015, substantially less than the 2.0-percent growth rate for
the total industrial sector. This is a principal factor in the relatively slow
projected growth of total industrial natural gas consumption.

Electricity Generation Natural Gas Consumption

Over the next fifteen years the key factors underlying
the increased use of natural gas in the electricity generation sector are
expected to be the growing demand for electricity and the attractive economics
of new natural gas-fired powerplants. Historically, the demand for electricity
and economic growth, measured by GDP, have tended to move together, nearly
mirroring each others= movements (Figure 8). As the economy grew, consumers= use of electricity also increased. In the 1950s and 1960s, as new electric appliances penetrated the market, the demand for electricity grew much more rapidly than the economyBoften
growing more than twice as fast in a given year.

The relationship between electricity demand growth and
economic growth began to change in the early 1970s as energy prices rose and
major electricity-consuming appliances, such as air conditioners and
refrigerators, saturated their markets. During the 1970s the gap between growth
in electricity consumption and economic growth narrowed rapidly. Through the
1980s and 1990s they have moved nearly in lockstep with one anotherBwith GDP and electricity consumption increasing at average
annual rates of 2.8 and 2.4 percent between 1980 and 2000, respectively.

Through 2015, the demand for electricity is expected to be driven by economic growth. However, because of slowing population growth, slow growth in electric-intensive industries, and the continued improvement in the efficiency of electricity-consuming appliances, the growth in electricity consumption is not expected to outpace economic growth. Although electricity consumption is expected to increase more rapidly than other end-use energy sources, it is projected to grow at a slower rate than the economy. Figure 9 illustrates some of the impact of efficiency improvements. Despite growth in the number of households, less energy will be used by refrigerators in 2020 than at present, as older, less efficient refrigerators are replaced with newer models.

The projections of electricity consumption are highly uncertain because many factors, such as technology development and consumer decisions, are very difficult to predict. In the Reference Case of AEO2000, the consumption of electricity is expected to
increase 1.4 percent per year between 2000 and 2015. With the alternative
economic growth assumptions in the High and Low Economic Growth Cases, the
annual growth rate of electricity consumption ranges from between 1.2 to 1.7
percent over the same time period. If the growth rate for electricity
consumption continues at the rate seen in the 1990s, it could be as high as 2.1
percent a year, the rate assumed in our High Electricity Demand Case. The table
compares the EIA projections of electricity sales in 2015 with those of other
organizations. The EIA Reference Case projection is around the middle of the
range of alternative projections, while the Low and High Economic Growth Cases
bracket the projections.

To meet the growing demand for electricity, electricity suppliers are expected to increase their use of existing plants and construct new plants as needed. In existing facilities, increased utilization of coal plants is expected to be important. However, when new plants are needed, natural gas-fired facilities are expected to dominate. In 1998, utility coal plants operated at an average capacity factor of 69 percent. Because these plants are very economical to operate, with average operating costs considerably under 2 cents per kilowatthour, their utilization will increase as the need for power grows. By 2015, in the AEO2000 Reference Case, the average capacity factor of these plants is expected to approach 82 percent. However, even with this increase in output, their share of total power generation is expected to decline slightly from 52 to 49 percent by 2015 since few new coal plants are expected to be added to the existing stock of power plants (Figure 10).

Even with the increased output from existing plants, a large number of new plants are expected to be needed between now and 2015. Some of these plants will be needed to meet growing electricity demand while others will be needed to replace existing plants that are expected to retire. Between 1998 and 2015, it is expected that 234 gigawatts of new capacity, approximately 780 average-sized 300-megawatt plants, will be needed. With the alternative economic growth assumptions, this projection ranges from 206 to 276 gigawatts, or between 687 and 920 average-sized new plants. If the demand for electricity continues to grow at more than 2 percent a year as it did in the 1990s, as much as 298 gigawatts of new capacity, or 993 average-sized 300-megawatt plants, could be needed by 2015.

The vast majority of the new plants are expected to be natural gas-fired facilities (Figure 11). Of the 780 new plants expected to be added between 1998 and 2015 in the Reference Case, 92 percent are expected to be natural gas-fired. Approximately half of this projected additional capacity will be simple combustion turbines while the other half are highly efficient combined-cycle plants. Other technologies such as new coal and renewable plants do not capture a large share of the projected new plant market. In AEO2000, some new coal plants are expected in the later years of the projections, after 2010, but new natural gas plants continue to dominate additions. Because of these additions of natural gas plants, the share of natural gas generation increases from less than 15 percent today to more than 28 percent by 2015.

The increasing market penetration of new natural gas-fired plants is largely due to the relative economics of natural gas plants compared with other fuels. Competing technologies, including new coal, wind, solar, geothermal, biomass, and nuclear plants are more costly to build and operate than new natural gas plants (Figure 12). For example, a new 300-megawatt coal plant would cost approximately $330 million and have a thermal efficiency of about 36 percent. On the other hand, a new 300-megawatt natural gas combined-cycle plant would cost approximately $173 million and have a thermal efficiency of about 50 percent. Even though coal is a less expensive fuel than natural gas, the price difference is not large enough to overcome the advantage of the lower construction cost and higher operating efficiency advantages of new natural gas plants through 2015. Over time, the advantage is expected to narrow as the gap between coal and natural gas prices is expected to widen.

Natural gas consumption by electricity generators, excluding traditional cogenerators which are included in industrial consumption, is expected to grow from approximately 4.1 trillion cubic feet in 2000 to 8.4 trillion cubic feet in 2015. The consumption grows relatively slowly in the first few years of the projections because the natural gas plants that are added are mostly simple combustion turbine facilities that will not be operated intensively (that is, these plants tend to operate as peaking units at times when demand is relatively high). In addition, increased use of existing coal plants meets a large share of the projected generation needs in the early years. However, by 2005 natural gas consumption in the electricity sector is projected to grow more rapidly.

With alternative economic growth assumptions, the projected consumption of natural gas in the electricity sector could range from 7.7 trillion cubic feet to 8.9 trillion cubic feet in 2015. Even higher consumption, more than 10 trillion cubic feet, is possible if electricity demand continues to increase as it did in the 1990s.

Environmental initiatives could also impact the growth of natural gas. Various analyses of policies to reduce greenhouse gas emissions indicate that natural gas can be expected to make further inroads in the electricity generation sector as concerns about carbon dioxide emissions result in a substitution of natural gas for coal (which releases more carbon dioxide per unit of energy produced when burned). See, for instance, the 1998 study produced by EIA, Impacts of the Kyoto Protocol on U.S. Energy Markets and Economic Activity.3

Conclusion

EIA recognizes that the future growth of natural gas consumption is highly dependent on a number of factors, including the U.S. economic growth over the next fifteen years, the rate of electricity growth, the price of natural gas, particularly relative to coal for electricity generation, and the development of natural gas generation technologies. However, under all market conditions that EIA can foresee, it is most likely that natural gas use will experience strong growth, especially for electricity generation.